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Notification for Capping HCEs


khn

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If a plan document states employees can contribute up to 100% of salary and doesn't specify capping HCE's, but HR typically limits HCE contributions to 8% each year due to testing issues, are there any formal notification requirements for this limit? For example, does a notice need to be sent 30 days before plan year end, etc? I can't find any info on this but it seems like notification would be fair in order to allow HCEs to plan accordingly.

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Is this HR department exempted from the requirement that the terms of the plan be followed? It shouldn't be a matter of meeting a notice requirement. If for a given year, it is determined that the plan cannot pass testing unless the HCEs are limited to 8%, then it must be done (even if prior salary reduction amounts have to be disgorged by the plan, at which time, one presumes, the affected individuals would be fully informed), but such a limitation must either come out of an explicit plan provision OR the results of a test that cannot otherwise be passed. It may be OK for HR to "encourage" HCEs to keep their contributions down to 8%, but without a plan provision to that effect or a test result forcing that, HR should not be able to enforce such a limitation.

Always check with your actuary first!

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Is this HR department exempted from the requirement that the terms of the plan be followed?

Never! If you read the plan carefully, perhaps the BPD, it should have boiler plate language permitting the sponsor to limit deferrals for HCEs in order to help pass the ADP test. Believe it or not, nothing is as arbitrary as having an exemption from following the terms of the plan. We know at least one instance; when the plan has language that is contrary to the Regulations.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I've always been opposed to limiting HCE deferrals in the document and I don't understand why. If a plan isn't safe harbor and it passes the ADP test, that means the HCEs could have deferred more.

Bill, this is [[[Generally]]] my take, but each case is different :)

There are situations where HCEs should be limited around the beginning of the year from Maximizing their deferrals (e.g. deferring $18,000 on the first $25,000 in salary). In few instances, a couple of those HCEs may end up deferring $3,000 on the first $4,000 in salary and then leaving the company in January. Mathematically, you'd have $6000 in deferrals that sent two 75% deferral rates for HCEs in the ADP test; and the failures will cause those who deferred at $18,000 to receive distributions.

I just say this to re-emphasize that each case is different. So, the demographics of the employees should be studied and the clients should be made aware of the different possibilities and then counseled into avoiding these types of pit falls. But, I do agree that most of the time it's not worth it. It does get challenging when you have HCEs who have low Compensation during the year but high (percentage of salary) deferrals.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I've always been opposed to limiting HCE deferrals in the document and I don't understand why. If a plan isn't safe harbor and it passes the ADP test, that means the HCEs could have deferred more.

Bill, this is [[[Generally]]] my take, but each case is different :)

There are situations where HCEs should be limited around the beginning of the year from Maximizing their deferrals (e.g. deferring $18,000 on the first $25,000 in salary). In few instances, a couple of those HCEs may end up deferring $3,000 on the first $4,000 in salary and then leaving the company in January. Mathematically, you'd have $6000 in deferrals that sent two 75% deferral rates for HCEs in the ADP test; and the failures will cause those who deferred at $18,000 to receive distributions.

I just say this to re-emphasize that each case is different. So, the demographics of the employees should be studied and the clients should be made aware of the different possibilities and then counseled into avoiding these types of pit falls. But, I do agree that most of the time it's not worth it. It does get challenging when you have HCEs who have low Compensation during the year but high (percentage of salary) deferrals.

Good Luck!

I will edit my response a bit to say that it is a different situation if there are multiple family members involved because the plan might be to maximize the contributions a certain way. But that doesn't involve document limitations.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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